Reverse auctions are gaining popularity as a procurement tool in the challenging economic climate.
Gas prices had gone down a lot in December 2008 when Maricopa County, Ariz., asked its vendor of bulk flour to lower its price of 38.5 cents a pound. A previous spike in gasoline prices had driven up the flour price because much of the commodity's price is tied to the cost of transporting it. But the price had not come down to reflect the now-lower fuel costs. The county uses almost 2 million pounds of flour a year to provide bread to about 8,000 county jail inmates, and Matthew Bauer of the countyoffice contended that lower gas prices should translate into a lower flour price. However, the supplier would not budge on the price.
Maricopa County decided to re-bid the contract using an online reverse auction, a strategictool that reverses the roles of buyers and sellers. Multiple pre-qualified suppliers openly bid against one another electronically in an allotted time frame, prices decrease as the auction progresses, and suppliers are allowed to see each other's bids. Reverse auction solicitation is gaining popularity as a creative solution to help government agencies in tight economic times. Bidding on Maricopa County's flour contract was slow at first, but a flurry of activity in the final hours - eight different prices from four vendors - concluded with a winning bid of 20.5 cents per pound. Ironically, the winning bid came from the same supplier who had earlier refused to budge on price.
The county has repeated the reverse auction for bulk flour every six months since then, thus allowing the changing market to dictate the low bidder and the price. In three years, Maricopa County has saved $976,000 on bulk flour through reverse auctions. "Reverse auctions keep the price competitive so we know we are getting the right price for the flour," says Bauer, who is now procurement supervisor for Maricopa County.
Maricopa County has also begun using reverse auctions for other products ranging from on-site drug testing kits to inmate shoes and canned fruit and beans. Bauer estimates the county has saved more than $2 million in the last year and a half using reverse auctions instead of competitive sealed bids, which only give vendors one chance to provide the lowest bid without knowing what any competitors are bidding. Bauer says that Arizona's procurement code is conducive to using reverse auctions although codes governing other localities might need to be modified to allow use of the tool.
"We have used reverse auctions for commodities when it is easy to bid apples to apples," said Bauer. "It's not the best type of procurement for specifications that are not well-defined or if there are many different products out there to fit your needs." For example, Maricopa County tried unsuccessfully to use a reverse auction to buy inmate mattresses to supply its six jails and detention. The range of products and varied specifications made it impossible for vendors to compete fairly.
Reverse auctions take about the same amount of time as using sealed bids, except the system tabulates the bids automatically, which eliminates the need for a formal bid tabulation. The BidSync software system used by Maricopa County to administer the reverse auctions includes a database that can extend the number of competing vendors. Maricopa has about 20,000 vendors registered in its vendor database, but only about 2,000 or 3,000 usually bid. In the case of bulk flour, Maricopa County had 52 possible vendors in their database and BidSync had another 175. In the reverse auction that followed, all but one of the participants had already been listed in Maricopa County's current vendor list.
Successful use of the BidSync reverse auction technology led Maricopa County to invest in the BidSync eProcure complete e-procurement tool, and the cost was more than offset by savings from the reverse auctions, said Bauer.
A surge in interest
Periscope Holdings provides a reverse auction function as part of its e-procurement solution BuySpeed. The company reports a surge of interest in reverse auctions among public entities looking for innovative ways to lighten their budget burdens. Using BuySpeed, auctions can be conducted online in real time, thus enabling suppliers to track and bid down against competitors. The process ensures the best possible price and lowest cost to government agencies. Reverse auctions can also be conducted online by third-party vendors such as BidBridge.
Brittany Devine, product marketing and client relations specialist for Periscope Holdings, reports that, although costs are the primary driving force, reverse auctions also offer other benefits, such as:
- a shorter solicitation cycle (eliminating the weeks needed to score and evaluate responses);
- greater price competition (vendors can track competition in real-time and have the flexibility to submit multiple bids);
- opportunity to demonstrate vendor diversity (by showing a willingness to use different suppliers); and
- fewer protests.
Two users of BuySpeed Online have realized first-hand many of the benefits of reverse auctions to provide measurable savings for public agencies. Knox County, Tenn., recently led a multi-agency auction in the joint purchase of 164 police vehicles, and the Arizona Departments of Transportation, Game and Fish, and Education have also seen tangible savings from reverse auctions.
Acquiring 164 police vehicles
Knox County's Purchasing Division began planning its first reverse auction in August 2010. The reverse auction capability had been added with a recent update of BuySpeed. The capability enabled Knox County to self-administer reverse auctions without involving a third party or having to pay a fee. The Purchasing Division identified 22 police vehicles in the Sheriff's Office budget that could potentially be acquired through this competitive method. After conversations with several other local government agencies, the Purchasing Division was able to recruit two additional agencies - the Blount County Sheriff's Department and the City of Knoxville - to compete their needs with Knox County. The resulting multi-agency cooperative bidding event was for 164 Police Interceptor Vehicles.
The reverse auction takes the place of a competitive sealed bid process, and the vendor does all the data input. All terms and conditions are determined before the auction begins. In the case of motor vehicles, detailed variables such as the wheel base and hubcap covers are specified before the auction. Delivery time is also specified. Any bid that doesn't comply isn't considered. Although the Knox County reverse auction stretched over 21 days as required by law, anyone could start bidding immediately as soon at it opened or anytime during the three-week period. Most activity happened in the last hour.
On Nov. 2, 2010, at 2 p.m., the state's first agency-managed on-line reverse auction closed and resulted in measurable savings for three local governments. Five different vendors submitted a total of nine bids with Alexander Lincoln-Mercury Ford submitting the winning bid.
The price dropped $645,000 from the auction opening for purchase of Knox County police vehicles, and the final bid came in $2,300 under the state prices per vehicle; the county saved enough to purchase extra vehicles. The other governments involved in the reverse auction were also pleased with the the outcome. "The ability to leverage our combined organizations is truly a win/win for all of us," said Keith Shields, Deputy Director of Fleet Services, City of Knoxville.
Knox County Purchasing Director Hugh Holt says there are a lot of administrative savings in reverse auctions, and time can be saved on the back-end related to followup with vendors. "The vendors saw it happen before their eyes," he said. "It's the most transparent bidding process a public agency can use." There is less chance of a protest - and the resulting huge administrative expense - because everything is based on cost.
Knox County has also received feedback from vendors who participated in a reverse auction, and they agree it is an easy process. "The web site for Knox County Purchasing is the easiest that I have encountered," said Herb Odom of Alexander Lincoln-Mercury Ford. "I was able to work in the system without a problem." Reverse bidding has also enabled Knox County to increase cooperation and collaboration with other local agencies.
Vendors were notified through the automated system of the reverse auction, and Knox County offered a non-mandatory prebid/training program. During training, attendees saw how the system works in a test environment with a mock reverse auction. The training session drew a full house - about 20 to 25 vendors and participating agencies. Knox County also offered a "how to participate" handout on the day of the auction including screen shots of the system. "We left them fully equipped to participate," said Diane Woods, Knox County contract and systems administrator. "These folks are salesmen, but given the ease of the system, anybody can use it."
Currently Knox County has a reverse auction on the street for passenger buses for the county's Head Start program and vans for the health department. "We are looking for other opportunities to use this tool," said Holt. "It may not fit every transaction, but there are some that it fits very well, and any time we can save time and money, that's what we're about."
From printing to chainsaws
Although legislation was passed several years ago to allow reverse auctions, Jean Clark, Arizona's State Procurement Administrator, said the state moved cautiously. First the state considered using a third-party, independent provider to manage the auction, but the pilot program never came to fruition. After training on the reverse auction capability added to the state's BuySpeed e-procurement system, the state saw the possibility of using the new tool. A key strategy was to find examples of products that could clearly demonstrate true dollar savings to help jump-start the program.
Reverse auction successes in Arizona include a State of Arizona Department of Education print job contract that was awarded at $1,254 below budget, or 20 percent below the opening price. In another reverse auction, Arizona's Department of Transportation saved 5.2 percent on the purchase of seven heavy-duty chainsaws. The auction involved multiple small vendors throughout Arizona, and the contract specified the product had to be delivered instead of picked up, which saved shipping costs. In 24 bids submitted for Arizona Department of Game and Fish all-terrain vehicles, the contract was awarded at 13.6 percent below opening bid.
Clark's office is responsible for procurement statewide, including 120 agencies, manages long-term statewide contracts, and does some direct purchasing and contracts for agencies that do not have their own procurement staffs. Some procurement is delegated to larger agencies with their own procurement departments, and the state-level staff gets involved in possible protests and oversees statewide policy.
One way the reverse auctions saved time for Arizona was by shortening the time the auction is open, from 14 days to a 5-to-7-day period. The Arizona statute does not specify a minimum period of time the auction must be open. Arizona also had good feedback from participating vendors, who are happy with the process. "They appreciate the fact that they don't have to make a decision in a vacuum," said Clark.
Arizona was also careful in providing specifications, terms and conditions before the auction began. "Everyone has agreed to terms and conditions up front," said Clark. "They can see if they want to modify their prices or not."
The state held webinars to "walk" the vendors through and explain the software application. A mass notification is sent to vendors listed in the state's database for a specific commodity code; the notification also tells them about the training.
Clark says Arizona is looking to use reverse auctions for a taxi service contract and is looking to expand the strategy into the construction arena. "Construction and project managers feel it would work," she said. "We have the plans and documents out there and they are just filling in the pricing. If it's online they can compete against each other. We are going to try it, but the industry may not care for it."
Clark urges procurement professionals having trepidation about reverse auctions to give the process a try. "It is beneficial and something they should embrace as one of their procurement methods," she said.
About the author
Larry Anderson is editor of Go Pro.